Thursday, June 21, 2012

I write in defense of my pension
and that of my fellow public employees. The late Senator Daniel Patrick
Moynihan famously quipped that people were entitled to their own opinions, but
not their own facts. In the recent debate surrounding public pensions, I have
noticed that many people desperately want to have their own “facts,” especially
those who want to “reform” public pensions. Here are the facts about how we got
to where we are today in Illinois, with an emphasis on the Illinois Teachers’
Retirement System (TRS).

Because they work on the power of
compounded interest, pension systems only work when all payments to them are
made in full and on time. This is how small, regular payments create large
amounts of wealth. While I cannot speak about other states and how their
pensions got to be the way they are, virtually every honest observer notes that
the Illinois General Assembly has not made its contributions to the Teachers’
Retirement System and to other public pensions.

The General Assembly has skipped
close to $15 billion in payments over the last decades to TRS alone, $11.2
billion since 1990. By foregoing these payments, the General Assembly not only
denied the value of the initial contribution to the fund, but forced the fund
to forfeit the earnings that these contributions would have garnered over time
had they been invested.

These gains would have been
considerable: the Teachers’ Retirement System has averaged 9.83 percent annual
returns since 1982. Arguments that pensions are set on unrealistic earnings is
not accurate in Illinois’ case; actuarial studies show that the pension fund
has made its projected earnings like clockwork. Therefore, the Illinois General
Assembly did not skip payments based on over exaggerated rates of return. It
did so simply because it was convenient and legal to do so.

In contrast, each teacher pays 9.4
percent of his or her income from each paycheck, supplemented by a .58 percent
contribution from each school district. Both teachers and districts have made
100 percent of their contributions on time, every time. They have no choice, in
fact.

This cannot be said for the
Illinois General Assembly, however. It often balanced its budget by skipping
pension payments, using the money for everything else – except the pensions for
its public employees: roads, bridges, even building a now empty prison. In a
bitter irony, some of the money even went to K-12 schools, forcing teachers to
cannibalize their future pensions to secure the state’s commitment to school
children.

We should note that taxpayers
benefited from this diversion of funds – they got more government services than
they paid for, since the money that should have gone into pension funds went to
other expenditures. Essentially, public pension funds became an easily-used
“credit card.” (It might also be noted that Illinois has among the lowest
ratios of state employees to the general population; it has outsourced services
for decades now, having been in the vanguard of privatization. One cannot argue
that these expenditures simply went back to public employees in terms of
salaries and benefits.)

Nor can one argue that the state
simply could not afford to make its payments. If it were not for the pension
debt, the State’s contribution would be about 6.3 percent to 8.6 percent. It is
true that this is a bit more than the standard FICA/Social Security contribution
employers make (6.2 percent), though it is less than the defined-contribution
approach, which would involve the cost of FICA and maintaining thousands of
individual 401(k) accounts and matching each individual employee’s
contributions. In the private sector, this usually averages 4 percent of an
employee's income. Hence, the average retirement costs for employers in the
private sector are approximately 10-11 percent of employee salaries, much more
than TRS.

Nor is the cost to taxpayers
excessive: the “normal” cost (without the debt) of last year's contribution to
TRS from the General Assembly would have only been $715 million, a mere $55 per
Illinois resident each year – a cost similar to purchasing the Sunday newspaper
each week. Even a teenager who spends $10 or $15 a week on bubble gum and video
games will pay that much in sales taxes in year, as will a retiree who dines at
a restaurant once a week.

The cost is not exorbitant for the
taxpayer – that is simply a lie told by too many editorial writers, politicians
and others who should know better. Hence, with the system running properly and
with full contributions from both teachers and the State, the Illinois Teachers’
Retirement System would have had 16-18 percent of teachers’ salaries to invest
at 9 percent at compound interest for 35 years – enough to pay the modest
pensions promised to teachers. That is, if the Illinois General Assembly had
done the right thing.

But instead of doing the right
thing, the Illinois General Assembly skipped payments and enjoyed “pension
holiday” after “pension holiday." ("Pension holiday" is the
horrid euphemism used for skipping pension payments.) This created a gigantic
debt of over $40 billion in unfunded liabilities for TRS, thus, driving up the
cost of the state’s contribution to the retirement fund. Last year, the state's
total contribution was $2.2 billion instead of $715 million, two-thirds of
which is accumulated debt.

Granted, the recent economic
crisis hurt TRS, as it did all investment funds across the world. Nevertheless,
a recovery is underway. According to a recent press release from TRS, “the
Teachers’ Retirement System Board of Trustees reported total assets of $37.3
billion at the end of March 2011, a 23 percent increase over the assets held by
TRS in 2009 during the depths of the world financial crisis. During the first
nine months of fiscal year 2011, the investment rate of return for TRS was
21.38 percent, besting the current target investment rate of 8.5 percent.”

Mr. Zakaria, you also seem
uninformed about one simple reality as well: the Illinois General Assembly DID
pass pension reform for all new public employees in March of 2010. This law
applies to every new hire after January 2011 and is much less generous than the
current system. Legislators wrote, passed and sent a bill to the Governor's
desk in under twelve hours. (I'll leave it to you to decide how democratic such
a process was.) The recent debate centers on benefits for current public
employees, which have special status due to the "Pension Protection Clause"
in the Illinois Constitution. For this
and other reasons, teachers believe that pension “reform” is an injustice. Can you perhaps see why?

2 comments:

One reform coming is the nebulous "access to TRIP" insurance. What does that mean? The state may cut funding to the insurance or in other ways raise the cost in the future. In return, teachers are to give up the COLA. That means those retired will lose due to inflation, be hammered by increased insurance costs and carry the burden of new and higher taxes.

Many teachers calculate that buying their own private insurance and keeping the COLA would be financially better. I've shopped the insurances and they do seem very comparable to TRIP, on the surface. How private profit medical insurance can compete with a non-profit state subsidized insurance plan baffles me.

My son is an insurance broker and he says there is nothing he could sell me that would compete with TRIP.

If the state does pass this reform, the state misses one point. Any promise to fund. Wait, they already promised to fund for 50 years and missed the mark 50 years in a row.

One compromise is to accept the funding and pension cuts that the politicians themselves take.

Govern Quinn wants school districts to take on the pension cost so they will be "more responsible for the contracts they negotiate." Does not the state already have a contract with the public employees?

One does not have to be a math whiz to realize that teachers on the average pension under the proposed reforms will see their incomes whittled down over 20 years so they will be standing in the food pantry line with high school drop outs.

Teacher/Poet/Musician

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Persona

A writer must “know and have an ever-present consciousness that this world is a world of fools and rogues… tormented with envy, consumed with vanity; selfish, false, cruel, cursed with illusions… He should free himself of all doctrines, theories, etiquettes, politics…” —Ambrose Bierce (1842-1914?). “The nobility of the writer's occupation lies in resisting oppression, thus in accepting isolation” —Albert Camus (1913-1960). “What are you gonna do” —Bertha Brown (1895-1987).